Real Strategies for Virtual Organizing

33

l\l. Venkatraman - John C. Henderson

Harmony among

three vectors —

customer interac-

tion, asset sourc-

ing, and knowl-

edge lei'erage —

and a strong IT

platform form

the strategy and

structure of a

business model

for the knowl-

edge economy.

N.VenkatramBn is the David

J.McGrath,Jr.Prolesior

of Management and John

Henderson is professor

ol maoagement, botfi at

Dostoo University School of

IVIanagemenl. In addition, N.

Venkatramao is principal and

John Henderson is Ihe direc-

tor at the Boston University

Systems Research Center.

As the pos-sihilities of the information rev-olution chalienKe tr.iditional businesslogic, conipanie.s :ire experimenting^ witha wide :irr;iy tif strategic aUernati\ es andorganizational forms. The appropriatenessof tlie current business model rooted inthe industrial ectmomy is c]iiestionable.Drucker lias outlined liis views of aknowledge-based organization. Quinn hasdocumented the shift toward a ser\'ice-iiased econotny with a focus on intellect,llamel and I'rahalad argue for a criticalPcK'us on core competencies and an orga-nizational design tliat best leverages them.Womack and Jones advocate a lean orga-niz:uion. anci Mandy painis a shamrockstructure.' We could cite many more opin-

ions, but the message is cleiir: the currentmodels of strategy and stnicture are woe-fully inadequate to meet the imminentchallenges of the information age.

During the pa.st X\\o years, we imdertooka systematic study to conceptualize thearchitecture of \'irtual organizing. Here,we present our views on the architectureof the twenty-first century business model.W'e choose the term architecture ratherpLiiposefully and define it as "providing aframework for the conduct of life, not aspec ification of what life should be.Architecture shouki facilitate, guide, andprovide a context; it should not provide arigid blueprint for conduct."- Moreover,

Sloan Management ReviewFall I9SB

Venkatraman • Henderson

the "building sluuikl preferably be ahead of its timewhen planned so that it will l5e in keeping with tlietimes as Iong as it stands."'

We reject a virtual organization as a distinct structure(like functional, divisional, or matri.\). Instead, wetreat virtualness as a strategic characteristic applicableto every organization; our discussion then is applica-ble to centur)'-old companies tliLit manufacturecement, chemicals, and auios as well as to new

34 entrants in the fa.st-changing high-technology market-place. We view virtualne.ss as a strategy that reflectsthree distinct yet interdependent vectors:

• The customer interaction vector (virtual encounter)deals with the new challenges and opportunities forcompany-to-customer interactions. IT now allows cus-tomers to remotely experience products and serx'ices.actively participate in dynamic customization, andcreate mutually reinforcing customer communities.• The assel coufigttratiou vector (virtual sourcing)focuses on firms' rec|uirements to be virtually inte-gnited in a business network, in sharp contrast to thevertically integrated model of the industrial economy.I'irms using the Internet for busine.ss-to-businesstransactions can structure and manage a dynamicportfolio of relationships to assemble and coordinate

the required assets for delivering \'a!ue to customers.• The kiioivk'cl^c k>ix'ra}>i' \ector (virtual expertise) isconcerned with the opportunities for leveragingdiverse s<)urce.s of expertise within and across organi-zational boundaries, IT now enables knowledge andexpertise to become dri\ ers of \'alue t reation andorganizational effectiveness.

No one vector adec|uately captures the potentialopportunities of virtual organizing; their iiik'rde/K'ii-dence creates the new business model. We view vir-tual organizing as a strategic approach that is singu-larly focused on creating, nurturing, and deployingkey intellectual and knowledge assets while sourc-ing tangible, physical a.ssets in a complex networkof relationships. We depart from the ciuTent litera-ture on \ irtual organizing that proposes incrementalimprovements to the biisiness logic rooted in theindustrial age. We develop our logic of virtual orga-nizing by placing IT at the center. The powerfulconvergence of compLiters and communication tecli-nology and the emergence of the Internet areenablers of this new business niodel. Nadler and hiscolleagues indicated that the creation of effecti\'earchitecture hinges on the use of structural materialscapable of implementing the architecture and dis-cussed IT'S power in creating future organizational

Figure 1

Virtual Organizing: Three Vectors and Three Stages

Vectors andCharacteristics

Stage 1 Stage 2 Stage 3

Customer Interaction(Virtual Encounter)

Remote experience ofproducts and services

Dynamiccustomization

Customer communities

Asset Configuration(Virtual Sourcing)

Sourcing modules Processinterdependence

Resource coalitions

Knowledge Leverage(Virtual Expertise)

Work-unit expertise Corporate asset Professional communityexpertise

Target Locus Task units Organization Inter-organization

Performance Ohjectives Improved operatingefficiency (ROD

Enhanced economicvalue added (EVA)

Sustained innovationand growth (MVA)

Venkatraman • Henderton Sloan Management Review

arcliilectuiv.' In n siiiiikir \\:iy. we helieve that theemerging; urcliitcctiirc of virtual organizing i.s notpo.s.sihle, or constructed elTecUvely, without the .sig-nificant power of IT.

The emerging global, digital economy

allows for establishing and leveraging a

two-way information link between a com-

pany and its customers — albeit through

remote and asynchronous mechanisms.

Each vector of our model ha.s three distinct stages(see /'i,i>itrc' I). Stage one focuses on the task units(such as customer ser\'ice, purcliasing. or new prod-uct developnieni). Stage two ibcLi.ses at the organiza-tional level on how to coordinate activities to createsuperior economic value. The third stage focu.ses onthe interoigunizational network to design and le\er-uge multiple interdependent commiuiiiies for innova-tion and growth.

Tlie.se ihree vectors ha\'e tratlitionally heen indepen-dent: they focused on isolated functions — market-ing, purchasing, and human re.sources, respectively,with their idiosyncratic processes and information.systems. For instance, marketing acti\ ities in the cus-tomer interaction vector were supported hy telepho-ny, call centers, and product simulations. Sourcing orpurchasing acti\ ities were siipporred l)y electronicdata intercliange (F.DI) and CAD/CAM integrationhetween suppliers and manufacturing processes.Decision .support .systems and groupware supportedmanagerial work. There was historicalh' no commonLinilying platform to pull ihese ditlerem activitiestogether. Ho\\e\er, the increased adoption of enter-prise systems like SAP. Oracle, Baan. anti Peoplesoft.comhined with the rapid acceptance of the Internetprotocols, offers the po.ssihilit)- of a common teclinol-ogy platform.

Our view of virtual organizing integrates these threehitherto separate threads into an interoperable ITplatform that supports and shapes the new husinessmodel. The cliallenge is to ensure internal consisten-cy across tlie three vectors and benchmark a profileof viitualnc'ss relative to competitors and referentcompanies in the marketplace. External benchmark-

ing hecomes critical as companies experiment withdifferenl approaches to design.

Customer Interaction (Virtual Encounter)The interactions of a company with its customers(and end consumers) in ihe industrial age occiuredthrough a multistage distribuiion network involvingwliolesalers. retailers, customer sef\'ice agents, andfranchisees. The predominant focus was on efficientlydistributing products in a linear fashion IVom manii-factiuers to con.sumers. The emerging global, digitaleconomy allows for eslahlishing and leveraging atwo-way information link hetween a company and itscustomers — albeit through remote and asynchro-nous mechanisms.^ This link is possible not only forconstimer products and ser\'ices hut also for htisi-ne.s,s-to-husiness products and sen'ice.s.

Some customers are interacting with companies innew, inntnative ways. They are testing procUicts alearly concept stages (for example, software andadvertising), while others are receiving e-mail repliesto prohlems not co\ered in product manuals (com-puters, electronic equipment, and industrial prod-ucts). Technologically savvy customers are constaict-ing customized news feeds (www.snap.com), review-ing and monitoring financial accounts (AmericanExpress, Schwab, or Fidelity), exploring real-estateproperties (w^vw.centuiy21.com). or reviewing videonews clips (www.cnn.com). Moreover. \'irtual con-sumer communities — which alter the traditional con-sumer role — are emerging.''

Corporations face new strategic c]uestions: What arethe tenets of marketing for the information age? Howcan we leverage the fiinctionalily of customer inlerac-tions in crafting sLiccessfLil marketing strategy? Whatis advertising s role under conditions of greater cus-lomer pull and fine-grained segmentation? Should weactively create customer communities or participate inthem unc)htrusi\'ely? To address these and relatedc|Liestions. we delineate three stages of customerinteraction: remote experience of products and scr-\ices, dynamic customization, and cListomer commu-nities."

Remote Experience of Products and ServicesTo imdersiand this stage, let us examine Sears,Roehuck's introduction of product catalogs, the firstsuccessful attempt at creating a virtual product expe-rience. It simulated key product features from a phys-

35

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Venliatraman • HendeisDn

ic-al space (storefront) to another physical space(paper), separated by time and distance. Custoniersexperienced the different products through the pagesof a catalog and made their purchase without actually.seeing or touching the product. Over the years, thecatalogs Ixjcame glossier, mail-order sales increased,and direct marketing became a major force. The infor-mation age has created the home shopping televisionnetwork: consumers virtually experience product fea-tures — signaling a shift from atoms to bits, in

36 Negroponte's words." 'W has allowed a more complex,intricate demoastration of features and functionality.

Remote and continuous links witb cus-

tomers become critical as the concept of

brand identity and brand equity are rede-

fined.

Similarly, the concept of remotely experiencing cus-tomer service is also not new hut is heing redefined.Since the early 1980s, building supervisors have hadsuperior customer service from Otis Elevators' remoteelevator monitoring. Schliimherger remotely readsutility meters; Sony provides PC owners with diag-nostics and repair over ordinary telephone lines. GEMedical Systems remotely supports lah technicians inhospitals dealing with medical images, and GEAircraft Engines remotely tracks the performance ofaircraft engines during flight.

More recently, the Internet has accelerated andredefined the possihilities of the remote product orservice experience, for example, the real-time mon-itoring of shipments (www.fedex.com; www.ups.com)or stock portfolios (www.yahoo.com). Airlines arepo.sting fares only for their freciuent flyer memhersthrough their Weh links (see, for instance www.usair-ways.com.) and hypa.ssing traditional travel agencychannels. Retail Iianks are creating high-tech linkswith customers (www. we I lsfargo, com/home; www.citihank.com); their challenge is to ensure that thesites complement the .service delivery at their hanks.

The possibility of remotely experiencing products orservices ha.s major implications for developing therequired business Infrastmcture. Charles Schwahredefined the brokerage husiness with a diiferentprice-point than full-service hrokers and offered a

portfolio of channels for customer service (1-800numhers, hranch offices, lelehrokers, and e-Schwah).Now, new entrants like E'Trade (www.etrade.com)and Ameritrade (www.ameritrade.com), which do nothave a physical presence, further threaten Schvvah'spricing staicturc. The challenge for companies in infor-mation-intensive markets is to manage the velocity ofthe shift from physical to electronic infrast met tires ancicompete effectively against those entrants that don'tIiave llie constraints of a physical infrastmcture.

The same challenge is driving software distrihiitors,such as Egghead, to reassess their di.stribution strate-gy: during the past year. Egghead has closed morethan seventy traditional software outlets and hasopened its first store on the Net. Its on-line storefront(vvwvv.egghead.com) features three main rooms —Internet products, busine.ss products, and games —with on-line product support. It is entirely reiinqiiish-ing its pre.sence in the physical marketplace to focuson the electronic marketspace.

The passive distrihution of standardized newsthroLigh traditional channels is also being redefined.Leading newspapers and magazines routinely allowreaders to hrowse their late.st issues on the Web:Fi)iciucicil Times (www.ft.com), Comfntlenvorld(vvww.compiitervvorld.com), /''oilnite (www.pathfind-er.com), Vl//rc'f/(www.wired.com), and 'Ihe h'conontist(www.economist.com). Nearly all are facilitatinginteractions hetween editors or writers and readers.

Traditional selling of textbooks at the heginning of a.semester is now relegated to an educational consul-tant or a value-adding partner throughout the .semes-ter. Leading textbook publishers are creating sup-plementary Weh site links to connect students andprofe.ssors throughout a course (www.mhh.coni;www.wiley.com; www.uol.com).

Product Companies. Clearly, consumer product com-panies like Procter & Gamhle, Colgate, Kraft Foods,and consumer durables and husiness-to-busincsscompanies like General Motors, General Electric,Allied Signal, and Caterpillar have crafted their husi-ness strategies by leveraging physical assets anddeveloping powerful global hrands supported hyma.ss advertising and mass distrihution. But remotelinks with customers apply equally well to thesecompanies. Remote and continuous links witli cus-tomers hecome critical as the concepts of lirand iden-tity and hrand equity are redefined.

Hen(tersan Sloan Management ReviewFall 1998

Kraft Intemclive Kitchen (www.kraftfoods.com) i.s anexample of :i consumer products company keeping intouch with its consumers liy providing information-based sen'ices like meal planners, recipes, lips, anc!cooking tecliniques. Kraft's intent is to have remote con-nection.s and interactions with consunicrs in new ways.

General Motors and its OnStar service use.s globalpositioning system satellite technology and a hands-free, voice-activated cellular phone to link the driverand the vehicle with the OnStar Center. Advisers pro-vide real-ti[ue, person-to-person services such asemergency help linked througli automatic detectionof air-liag deployment, stolen vehicle tracking, routesupport, remote diagnostics, remote door unlocking,and a variety of travel and personal services. GM canprovide information-based services to the driver andeven remotely diagnose tlie car continuously for afixed service fee (www.onsuir.com).

Kvery company should assess how its products andservices can be experienced virtually in the new mar-keting infrastmcture. A Wel) site is essential. Thequestion is liow best to use the Web's power to cre-ate superior linkages with custoniers.

Dynamic Customization of Product and ServicesThe second stage ofthe customer interaction vectorf(K'uses on the opportunities and challenges in dynam-ically customizing products anci services. Competitivemarkets are rapidly eroding margins due to price-based competition, and companies are seeking toenhance margins through customized ofTerings." Ourview of dynamic customization is Ixised on three prin-ciples: modularity, intelligence, and organization.Modularity is an approach for organizing complexproducts and processes efficiently.'" Intelligencethrougli continuous information exchange with con-sumers allows companies to create products andprocesses using the lx.'st possible modules. Moreimportantly, dynamic customization of products and.services requires an organization that is fundamentallycommitted to operating in this new way.

Modularity. Product or service modularity reciuiresthe partitioning of a task into independent modulesthat function as a whole within an overall architec-ture." The cla.ssic example of a modular product isIBM's System/3f)0. The concept has heen extended toother industries, l-or instance, in a.s.semhl!ng cars,Toyota, BMW, Mercedes-Benz, GM, Porcl, andChrysler create product platforms that allow modular

Intelligent sites learn their visitors'

tastes and deliver dynamic personalized

information about products and services.

reuse. The benefits are not only lower unit costs butal.so greater customer satisfaction; companies canconfigure automobiles to customer requirements.Modularity also works for services, especially infor-mation-intensive services. Take, for instance, personalnews feeds (www.cnn.com; www.cnet.com) and cu.s-tomized stock ciuote.s and tracking (www.schwab.com).It is possible to reuse various modules of news andinforiuation Eo construct a customized news service atCNN Interactive anci a customized, interactive editionof I'he Wall Street Jottntcii.

In place of .standard textbooks, instructors now assem-ble textlxx)ks that suit their pedagogical style andobjectives liy .selecting modules from different source.*;.McGraw-Hill's College Division pioneered this conceptthrough its I'rimis offering. Primis users can create acustom textbook from modules within the Primis data-ba.se and a.s.sociated tiataba.ses. Many other textbookcompanies offer similar configurations.

Intelligence. Dynamic customiz^ation is rooted In thedeployment of intelligent agent .software, such asFirefiy (www.firefly .com). Firefly Passport is availableto end users who rank Web sites as they surf theInternet. Firelly uses the data lo create consumer pro-files. Based on an automated collabonitive filteringprocess, Wei") site operators can match users with simi-lar profiles and make recommendations based on theirshared interests. The automated collabonitive filteringprocess lets u.sers receive real-time, personalized list-ings for items in a site's catalog of products, services,or content. The result is intelligent sites that learn theirvisitors' tastes and deliver dynamic personalized infor-mation aboul products and services. As the Webbecomes the main marketing infrastaicture and asintelligent agents such as Firefly Passport gain moresustained use on the Web, there will be greater oppor-tunities and pressures Ibr dynamic cu.stomization.

A primitive application of automated collaborative fil-tering appears on sites such as Yahoo's personalizedsite (my.yahoo.com), a movie recommendation site(www.filmlmders.com), and Barnes and Noble's on-line book.store (www.barnesandnoble.com).

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Venkatraman • Hendenon

The most profound aspect of interaction

in the virtual model is the emergence of

electronic customer communities.

Dynamic cii.stomization is po.ssihle .since these Web.sites, .suppcjrtL'd hy ugL-nts. levfiagf in real timt*each users experiences to guide others tt) rele\'ant

38 content and products. The sites incorporate theirentire user ba.se. not ju.st Ilie thoughts of a lewexperts. Indeed. e\'eiy .search engine is trying to dif-ferentiate itself llirough its .suj-Jcrior ability to createcustom profiles.

Organization. Ultiinutely, niodularit)- and intelli-gence are useless unless the organization de.sign isgeared to deliver products and serxices on adynamic, adaptive hasis. Organizaiions need tochange how they look at marketing processes,shifting from an inside-out perspective to an out-side-in perspective. For example, in personal com-puters, Dell is clearly leading with its dynamic cus-lomization offering. Dell s succe.ss relative to otherswithin the computer industry is attrihutahle to itsahiiiiy to develop an entirely differeni busine.ssmodel on the concept of building to order.'-Similarly, the challenge for McOraw-IIill's Primisdivision is to rno\e from textbook modularizationand go on to create an organization that can deliv-er educational solutions for customers.

The challenge of dynamic customization rests ongreater decomposition of products and services intomodules that can be combined to deliver increasedfunctionality. The numher of Web transactions willrapidly increase as electronic commerce goes main-stream. Modules will be redefined continuously, andmore information will be captured as consumersbecome comforiable with intelligent agents ihai workfor them. Over time, consumers will expect enhancedcustomization for fair value in reunn for aggregatorsconsolidating detailed personal information.Marketers will focus on as.seiiibling for modules thatdeliver cu.stomized solutions.

Customer CommunitiesThe most profound aspect of interaction in the virtualmodel is the emergence of electronic cu.stomer com-muniiies. The.se coninumilies signal a power sliihfrom manutaciiirers to ciistoiiiers: the communities

are information-gathering and information-disseminat-ing conduits. Pie\ iously, in the industrial economy,consumers could not he effectively linked togetlieracro.ss lime and space.

Hagel and Armstrong offer live defining characteris-tics of virtual communities: distinctive focus, capacityto post their content for access to the wider conimii-nily, appreciation of member-generated content,acce.ss to competing offerings, and commercial orien-tations. They state. AVe cannot yet point to a singlee.xample of a virtual community that incorporates alllive of the defining cliaracterisiics."" We contend thatcustomer communities can exist with only the firslthree characteristics. The lasl two characteristics —competing offerings and commercial orientations —apply lo only a subset (jf comnuinities.

Some customer communities refiect strong commit-ment to brands. Harley-Da\icison*s site (www.hadey-davicison.coin) houses the Ilarley Owners Group(IIOG) — a Weh siie for Harley owners to share theirstories and pictures. This community does not overtlycreate new product sales liLii does maintain animportant link wiih core customers und enhancebrand identity.

Citibank — in partnership with The Mining Company— has created a community on its Web site Ibr cus-tomers to learn about Citibank's products and ser-vices. It uses bulletin hoards, chat rooms, e-mail, andoiher features so prospecti\'e customers can interactwith current customers and receive testimonialsdirectly from them (www,citibank.com; WT\'w,the-miningco.com).

The Intel Pentium chip case exemplifies the role andpower of customer communities e\en when an orga-nization does not .sell its products directly to llie enduser. The light-knit user comnnmity had access loinformation about poieniial problems with Intel'sPentium chii> and forced Intel lo act. The community,supponcci hy Usenet groups, made Intel rethink itsheiuistics for product recall. Intel nov.- has a news-group feature within its site (newsgroups,intel.com)and is activcK- participating in its customer group.The source of the group s power came from knowl-edge (about the performance parameters of thechips), not from scale and volume of purchase,I'nlike buying cooperatives. indi\'iduals wiihin a cus-tomer coninuinity retain their rights about brand pref-erences and purchase decisions.

Venbtiaiiian • Hendeison Sloan ManagemenI ReviewFall 1993

Amazon.com (www.ama/.on.com) is often touted as•An example of how to lewruge the power of cus-tomer communities. .Amazon U:\s created a \'irtualbookstore with minimal physical assels and a partiCLi-lar focus on customer relationships. Will Amazonfatle away as other serious competitors like Barnesand Noble (www.barnesandnoble.com). Borders(www.Borders.com). and Microsoft (\\ww.books.com)enter the fray? As long as ,-\niazon is able to orches-trate a tight-knit amimunily of avitl readers, who cre-ate and di.stribute their own content (in the form ofre\'iews). competitors will h:i\'e difficulty dislodgingand disintegrating this comniunity. The challenge forAmazon.com is to provide balanied rex'iews ratherthan only f:i\"orable ones.

Consumer communities are in the early stages.'"Nevertheless, they could cxerci.sc significantly greaterpower in the future and transform the role of market-ing. .Should marketers orchestrate customer communi-ties for their own products or invohx- a third party?Companies such as Intel. Marley Oavid.son. I-ggheadSoftware (www .eggheacl.com). Tnuelocity (www.trav-elocity.com). Toyota (owners.toyota.com'ent ranee.html)and Apple (lompuler (www.apple.com/usergroups)are forming customer communities around iheir prod-ucts and brands.

At the same lime, some communities form without theinvolvement of major .sellers. I'or instance, photogra-phy (www.photoshopper.com). automobiles(www.autoweb.com; www .cdmunds.com. www .net-market.com), and .some specialized areas like waterutility (www.waleronline.com) and air pollution(www.pollutiononline.com) gain credibility largely dueto their lack of ownership links to product and ser\'iceprovitiers. These communities must generate andmaintain ihe consumers' tru.st as they collect personalinformation while provitling \aiue-added senices.

As \'irtual organizing becomes more widespread.companies must recogni/e communities as part of thevalue deiiveiy system and re.spond appropriately intheir strategies.

Questions for Managers• Do you have a .strategy to virtually connect withyour customers that Incuses on capturing informationand Icv'eraging knowledge? 'Hiis contrasts sharply to.setting up a distribution .sy.stem that focuses on effi-ciently tlistributing pi'oducts anti scr\'ic'es.• Have \-ou dex'elopcd apjiropriate niechanism.s so

customers can reach you twenty-four hours LI day,seven clays a week? Can customers experience salientproduct features remotely? Can cu.stomtrrs gain accessto a databank of answers to frecjuently asked ques-tions so they can solve some problems themselves?More importantly, how does your remote accesscapaliility rank against your competitors and othercompanies that may do business with your cus-tomers?

• How extensive is your capability to cu.stomize yourproducts and services over their life cycles? While itis becoming relatively easier to customize the productor ser\'ice at creation or delivery', the challenge is todynamically link to the customers to refine featureso\'er time.

• Does your organization still reflect a make-to-sellorientation rather than a make-to-order philosophy?The latter is more in line with a sense-and-respondapproach to virtual encounters.

• Do you plan to be a passive participant or anactive orche.strator in dealing with emerging cu.stomercommunities?• How are you assessing your progress in the cus-tomer interaction vector as the marketplace demandsgreater remote access, dynamic customization, andparticipation in the customer community?

Asset Configuration (Virtual Sourcing)The second vector focuses on accjuiring critical assetsand resources, a clear move away from vertical inte-gration toward greater reliance on componentsobtained from external markets. As they move froman industrial economy, many corporLitions will con-centrate on creating and deploying intellectual andintangible assets while sourcing tangible, physicalassets from a complex business network.

I\ffective contracting for complementar\' capabilitiesthrough a network of suppliers nnd .subcontractors isa characteristic of virtual organizing.'' Davidow andMalone note: "For a virtual corporation to succeed, itmu.st be closely linked with its suppliers as to createa shared destiny. . . . Ultimately, even the boundariesbetween them will become indistinct."" Goldman etai. highlight the importance ofclo.se relationshipswith suppliers anci subcontractors to realize efficiencyand flexibility — critical indicators of organizationalagility.'" Quinn describes Nike as a model for effec-tive sourcing of manufacturing competencies: "Nike isbasically a research, design, and marketing ctjmpany—• out.sourcing 100 percent of its athletic footwear

39

Sloan Management Review Venkatraman • Hendetson

manufacturing to numerou.s production partners'abroad."'"

As corporations refocus on their core competenciesand move away from vertical integration, they willobtain coniplementar\' as.sets through interfirm rela-tionships.'" For example, con feet ioner\' companieslike Ne.stle, Mars, and others get their packaging fromleading packaging and printing companies. Nike andReebok get their shoes, based on their proprietary

40 designs, from leaciing Asian contractors, Chrysler'sturnaround is often credited to its .sourcing capabili-ties, reflected in its relatively higher percentage ofconlracted parts. Dell's success is attributed lo ilssuperior .sourcing strategy. Hoeing developed its latestplane, Boeing 777. with a portfolio of relationshipsamong subcontnictors and lead cu.stomers.

Nearly every m:ijor treati.se on the logic of new .stnile-gy and competition di.scii.sses the requirements ofeffective sourcing of competencies.-" However, this isnot u simple choice between niake-\ersus-buy or ver-tical integration but involves a continuous reconfigu-mtion of critical capabilities asseinliled through differ-ent relationships in the business network.'' IT allowsthe po.ssibility of efficient .sourcing of standard mod-tiles and creates opportunities for process outsourc-ing. There are three stages of as.set reconfiguration —sourcing modules, process interdependence, andresource coalitions.

Sourcing ModulesThe first stage in this \ector deals with the benefits ofefficiently sourcing standard module.s or componenis.Advances in the industrial age were based on prod-uct modularity — building a complex product fromsubsystems designed independently yet fimciioningus a seamle.ss, integrated entity. GM. Ford, andC;hrysler operate more like assemblers and integratorsof subsy.stems than traditional vertically integratedmanufacturers. Baldwin and Clark argue ihal in anew age of modularity, the value-adding role of acorporation is less in the manufactLire of a criticalcomponent than in the creation of a product or ser-vice architecture.--' Thus the designer assembles multi-ple interlocking produci modules to deliver a superi-or .solution, while controlling the architecture of thesubsystem and its role in delivering value.

For more than a decade, the ptjwer of electronic datainterchange (HDD has sup[xirted the ability lo effi-ciently source modLilai' products. Wal-Mart pioneered

a new retailing tnocle! by leveraging a sophisticatedEDI network wiih its suppliers to radically lower ilsinvenioiy le\'el. In Negroponle's words. Wiil-Mart sub-stituted bits (information) for atoms (inventory) toenhance its operating margins to a level previouslyunseen.-' F-DI has had a significant role in reducinginventory levels in .supply chains within con.suinerproducts (Procter & Gamble. Kraft General Foods),athletic shoes (Nike, Reebok), apparel (Gap.Benetton), aircraft puns (Boeing, GF), and computers(Dell. Gateway).

The Web is pushing the ability to source standardproduct modules even further. Cisco Sy.stems Inc.. forexample, expects to .sell SI.8 billion worth of Internetproducts. Boise Cascade Office Products (www.bcop.coni) has deployed an extranet for its largest 600corporate customers, anci its margins haw doubledcc^mpared to its traditional openitions. Dell is .sellingmore than $3 billion in computers over the Web.mainly to corporate customers like Shell anci Boeing.

Geneinl Electric"s Trading Process Network (TPN)started as a .ser\'ice to streamiine GE's procurement of.standard products within GK Lighting. It has nowexpanded to cover a broader range of business units.The network links more than 2.SOU GF trading part-ners and accounts for more than SI billion of pro-curement in 1997. By initial estimates. TPN hasreduced the procurement-cycle time by SO percent,procurement-process costs by 30 percent, and actualmaterial costs by 20 percent. GH is expected tosoLirce more than S5 billion of procurement annuallythrough TPN by 2000.

Sourcing Logic. Ser\ices like GF.'s TPN force man-agers to constantly ask: What assels can we obtainfrom outside without loss of competitive advantage?When should we revise our sourcing logic?

The selection of a.ssets is complicated because theircriticality changes over time. In the 19H()s. IBM con-ceptualized the personal c-oiiipiiler market around ilsproprietaiy architecture. It purchased operating sys-tems from .Microsoft (MS-DOS and OS/2) andmicrochips from Intel. However, as the technologyarchitecture evolved. IBM was left withoui a criticalasset in the clianged marketplace. The market shiftedfrom :i hardware standard that favored IBM to a newstandard based on .software (Windows) connected tochips (Intel). So, while IBM's original sourcing deci-sion might have been efficient and prudeni, il could

Venkatramaa • Hendeison Sloan Management Review

not adapt ils sourcing logic to the changing marketconditions.-'

Process InterdependenceThe next stage focuses on the interdependence ofbusine.ss proces.ses across organiziUionai boundaries.External specialists can CLirn" OLII informution-intensi\*e inisiness jirocesse.s witiiout ioss oi controi.During tile past few years. se\'erai speciaiisi businessprocess firms lia\e emerged in tiie areas of account-ing. in\entoiy controi, customer senice. cali-centers.dataiiase anaiysis. teiemarketing, anci itjgistics.Business process outsourcing wiii continue toincrease as more speciali.st iirni.s emerge in the recon-figured business network. I-or exampie:

• DirecTV, which delivers aiiout ISO channels ofsateliite television programs, is working witliMATRIXX. a iuisiness unit of Cincinnati Beli. to deiiv-er superior customer ser\ ice. From its dedicated facii-ity in Suit Like City, L'taii, MATRIXX provides tele-phone customer ser\'iee and sales support, wliicliincludes ecjuipnient deaier referrais. programmingsign-up, and compiete customer .senice and accountmanagement. MATRIXX is tlie extension of DirecTVoperations iiy providing more than 2.000 dedicatedcustomer service representatives wlio iiandie about20 mliiion caiis a year. Tiiis marks tlie first time amajor corporation has entrusted its entire customerser\"ice operation to an outside telephone marketingcompany on such a grand scLile. DirecTV iiiis inte-grated its processes with MATRIXX. thereby leverag-ing its expertise at managing customer reiLitionsiiips.

• Aiiegiance Corjioration recently spun off fromBaxter Healthcare. The company, known for its leg-endary ASAP system, created ;i separate eniiiy tofocus on logistics and malerials management process-es.-* In Miircii 1996. Baxter announced an unprece-dented agreement to work with Methodist HealthcareSystem of San Antonio, a joint-venture partner withColumbia Ilealtiicare System. L'nder the agreement.Baxter operates a ser\-ice center to support the con-solidation and outsourcing of seiected funclions witii-in the Metiiodist Heaithcare System and to implementprocess iinpro\ements to reduce costs. More impor-tantly. Metiiodist is Ie\ eraging Baxter's expertise inthree proces.ses: distribution and logistics, operationsefficiencies, and resource management. Furthermore.Baxter's compensation is directly tied to the perfor-mance ie\'eis of these processes. AiiegianceCorporation's stock price has more than doulileci

since the spin-off, anci the firm has a market capital-ization of mcjre than $2 billion.

• Kraft Foods is iiiterlwining its marketing processeswith the data ccjilectlon anci analysis at ACNieisen. aieading information provider in tiie consumer pack-aged gotjcis industiy. The early avaiiaiiiiity of market-ing data tiirough process integration i'>etween tiie twoorganizations aiiows Kraft Foods lo respond to mar-keting trends c|uicker anci more effectively than itscompetitors. Kraft has benefited by reconfiguring itsmarketing processes across organizational boundaries.

• National Semicoiiciuctor (NSC), tiie tiiirtcentliiargest computer-chip maker, entereci an agreementill whicii FedEx manages its iogistics operations. Intiie eariy 1990s, NSC reaiized that a major driver of itsoperationai inefficiency was its outmoded process formo\*ing in\'entory. Since NSC could not aciiie\'e theiiest-in-ciass process ievels of a iogistics companywithout taking vaiuable resources away from productdesign and manufacture, it outsourced its processesto FedEx. NSC. tiirougii its iink with I'edFx. hasiiiipro\'eci its process performance: it nio\es productsfrom facton- to customer in about four days. ;md itsdistriijution costs have failen from 2.6 percent of rev-enues to 1.9 percent.

• KedEx. on tiie otiier iuuici. has iiecoiiie a j")iuyer intile eiectronics commerce anci iogistics maiketfiiaceij\' piu-sicLiliy mo\'ing goods from far-Hung manufac-turers to their gloixii customers. Its new ser\'ice.Virtual Orcier. takes and processes orders, inciudingarrangements for siiipping. provides access to ship-ment status, and iuinciies customer c|ueries. Indeed.its goal is to become the airline of the Internet. It hascombined electronic ct)mmerce and logistics opeiii-tlons and accjuired Caiii)er Logistics to ensure a f'uilrange of sei-vice capai>iiities.

l^rocess reengineering captured managers* imagina-tion in the 19HOs and early 1990s for one rea.son:inipro\-ed operating margins. Now. another shift.process outsourcing, is "the deiegation of one ormore business [processes to an external provider wiiotiien owns, manages, and administers die seiectedprocesses based on measurable metrics."-" This isattractive because of greater asset utilization. Asprocesses become more standarciized and as tiie mar-ket matures witii more staiiie participants, many cor-porations wiil recognize the criticality of businessprocess outsourcing. Specialized firms like MATRIXX

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Venkatraman • Headenon

and FedF.x can seamlessly carry out customer serviceanci iogistics: at tiie same time, extranets can ensureliiat linns do not lose controi of their processes.E\'ery corporation siiouici assess tiie iieiieflts anci risksof cariying out these processes themselves. Tiius IT isfundamentally affecting the business scope ol mostorganizations.-^

Resource CoalitionsThe third stage in the asset configuration vector

42 focuses on the establishment of a resource network.in wiiicli tiie firm is part of a \'ii5rant, dynamic net-work of compiementaiy capaiiiiities. A corporationbecomes, not a conventional portfolio ot products orbusinesses, but a portfolio of capabilities and rela-tionsiiips. Every organization is either impiicitiy orexpiicitly positioned in a network of resources wiiereit acc|uires compiementary capaiiiiities. Corporationsare increasingly relying on external sources not onlyfor support activities liut aiso for critical resources.Positioning a firm within a iiroader netwcjrk ofresources in the marketplace is a driver of competi-tive advantage. Consecjuently. tiie strategic ieadershipciialienge is to orciiestrate an organization's positionin a ciynamic. fast-changing resource network. Threeexamples heip iiiustrate the ix-nefits of re.sourcecoalitions:

• When viewed as a portfolio of capabilities throughrelationships. Nike is a new breed of organizationthat has positioned ilself slrategicaiiy within a net-work of complementaiy resources. Nike a.ssemiiiesliie rec[uireci capabilities tiirougii a coaiition. inciud-ing production suiicontractors in Asia, ad agencies(Weiden-Kennedy), web suppcjrt (Vivid Publisiiing).retaii outiets (Eootlocker). exciusive contracts witiiathietes (Michaei Jordan. Tiger Woods. Andre Agassi),preferred contracts witii |)rofes.sionai teams (DaiiasCowboys), and universities (Ohio State footixiii.University of North Caroiina basketbaii). Nike'sad\aniage is based c n the superior orchestration ofits position in the resource coalition. As it.s competi-tors strive lo construct similar coalitions to neutralizeNike's acivantage, Nike's success wiii dei^enci onproactively aciapting its network to responci to newmarket rec|uirements.

• Charles Schwab has successfully e\ol\eci from :inundifferentiated discount broker it) a key playei"through its offering, OneSource Schwab positioneditself within a resource coalition composed of inde-pendent financial acK'isers (who acl on behalf (jf indi-

vidual in\'esiois). a broad array of financial productcompanies (mutual funds, stocks, initial public offer-ings, debit cards, anci iife insurance), provicieis ofresearcii reports. ;iiici se\'ei*Lil teciinoiogy flriTis (suji-porting its e-sciiwaii seivice). This vigcjrous networkunderpins Schwab's coiupetiti\'e acKantage. Wliiieinciividual eiements of the network can iie imitated,Schwaii's aiiiiity to integrate tiie different fLicetscohei'cntK is clistincti\e. Ils future Micce.s.s wili befundamentally ba.sed on its ability to adapt this net-work to ciianging market and competitive ccjdditions.

• As part of Amazon's attempt to create a powerfuliiusiness modei. ii is orchesti'aling afflliateci sites asassociates to sei-ve as extencied bookstores. The asso-ciates establish their own book.stores on their Websites or place banners and k)gos to direct traffic toAmazon's site, ln return, they receix'e a conimi.s.sionon books purchased ihrough their relerrals. l-'orinstance, a search on AkaX'isia triggers an opportunityto order books on the selected topic. Amazon's suc-cess will be significantly affecled by ils ability lo cvn-trally position ilself in the constantly reconfiguringresource network.

Participation in Resource Coalitions. In the \ irtualintegration model, one firm does not dominate allothers in a network. 'I'luis es'eiy firm balances ilsleadership position relative h) one set of resources.with secondary" roles related to olher c-omplemeiitaryresources. F'or instance. IBM is dominant in the main-frame coiiipuler arc-hitec-[ure while it follows stan-dards established in other areas (e.g., \Vinck)ws-Inlelarchitecture). Siiiiilariy. I-'ideiity distriixites its fundstiirougii Sciiwab wiiile aggressi\'eiy promoting itsown Funds Network as an alternative. Those compa-nies tiiat can carefuiiy anaiyze tiieir relative ciepen-dence on otiier piayers in tiieir resource coaiition andensure their unic|ue capabilities will be successful.

E\ery organizalion is dejienclent on lelatioiisliipsfor assembling complementaiy capabiliiies.StarliLicks has eiiieiged as a major coffee retaiierwitii saies of more tiian SI biilion and a 6.3 per-cent return on in\'estment. Moiv impressi\'e is itssttjck market capitalization — more than SS billionin June 1998. Instead of committing its internalresources to build a brand image. Starbucks hasfbrmeci a \ iriual network of complementaiy playersinto a coalition of I'niteci Airlines, .Marriott anciWestiii Hoteis, Star Markel. Pepsi, and Barnes andNoble, among otliers. In doing so. it has created a

Venkatraman • Henderson Sloan Management ReviewFall 1998

le\'el of brand ecjuity far greater than its ievei ofresource depioyment.

Shifting Value Drivers. The importance anci reiati\'epriorit)" of resources ciianges o\-er time. IB.M, Apple,and Motorola pooled their resources to create thePowerPC. However, they could not establish a \ iablealternalix'e to \Vindows95/NT anci aiiandoneci tiiecoaiition. Now tiiey are part of tiie resource networkdominated by Microsoft anci Intei. More recentiy,IBM. Sun. anci Oracle formed a network to establishthe Network Computer (NO as an alternative to theWintei piatform.

Such coalitions highlight another impor-

tant characteristic of virtual organizing:

the hlurred distinction between competi-

tion and cooperation.

Sucii coaiitions iiigiilight another important charLicter-istic of virtual cjiganizing: the blurred distinctionIietween competition and cooperation. E\'eiy compa-ny is positioned witiiin A resource network andsimuiiancously plays both competitive and coopera-tive roles. Sheli and Amoco iia\'e pooied most oftheir w-est Texas oii fields to make upstream opera-tions more efficient, while competing witii eacii otiierin rcftaiiing. BP and ARCO Aiaska iiave a cooperativeagreement on maintenance, operations, procurementtranspcjrt, and driiiing. while the\' compete in otherareas of the value chain. Blurring boundaries are alsoevident as Netscape. Sun. Microsoft. Oracie. Appie.IB.M. Digital, Intei. Lind others simuitaneousiy tr\' toestaiiiisii superiority anci ciistinction on liie Internetwiiiie recognizing tiie need for interoperaiile technoi-ogy architecture. Knowing where and how to addvalue is important tt) strategy deveiopment in tiiisnew game of co-opetition (tiie iogic of comi^iningcooperation and competition).*

Creating a resource coaiition anci nax'igating underfast-ciianging market conditions is not simpie. Riiiemakers in a resource coaiition can iose liieir ability toset rules wiiile internal and externai conditionschange, as in the IBM PC case. Similariy, Appie.which iiad a central position in the resource coalitionfor tiie personai ciigital assistant (wiien it introduced

Newton), iost its position to Pilot. Hewlett-Packard,and Casio. Similarly, Xerox did not capitalize on itsearly leaci in tiie graphicai user interface. Digitai'sresource coaiiiion faitered. whiie .Microsoft, Sun. anciIntei gained tiieir positions due to superior resourcenetworks.

Questions for Managers• Does your organization lia\'e a logic for sourcingthat distinguishes the assets to manage inside fromthose that can be a.ssembled via relationships in thebusiness network?

• Do you ha\'e a .sy.stematic approach fbr identifyingthe modules that you can obtain from external part-ners? How efficient is your sourcing process com-pared to companies such as GE's TPN?• Do you consider process outsourcing as the bestway to allocate internal resources to high-valuc-:idding areas? .More importantly, do you still carry' outprocesses iniernaliy tiiat may best be done outside?

• Can your sourcing strategy dynamicaiiy respond tomake-partner-buy decisions? Is it structuring andiiKuiaging a portfbiio of relationships for obtainingthe ret|uired capabilities?

• Can you create interdependencies within yourprocesses across organizational i')oundaries? .^re tiieyseaniiess and supporteci by IT?• How weli arc you iiaiancing dependence on part-ners in tiie resource coaiition witii tiieir dependenceon you? Are the coaiition partners favoring you overyour competitors (wiio may aiso overiap witii tiienetwork fbr accessing siniiiar resources)?

• How are you asse.ssing your progress in tiiis vectoras you stri\"e to efficientiy source moduies. reconfig-ure processes, and orchestrate a superior positionw ithin the resource coalition? Do you liave a score-card of financial and operational metrics to monitoryour performance?

Knowledge Leverage (Virtual Expertise)The current trend is toward greater empioymentopportunities in smalier companies, fewer permanentor guaranteed joiis. more work done at remote ioca-tions, greater reiiance on contract workers, andgreater miiization of teams. Drucker has asserted thatcompanies are siiifting "from the command and con-trol organization, the organization of departments anddi\"isions. to the information-based organization, theorganization of knc;)wledge specialists."-" The basiceconomic resource is not land, physical resources, orcajiital but knowledge and inteiiectuai assets."' In

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Venkatraman • HendersDn

Quinn's view of an inteiiigenl organization rooted inknowledge: "These knowlecige assets can disinterme-diate iiureaucracies, draniaticaiiy iower overiieadcosts, support rapid execution of strategies, and suii-stantially increase the iearning rate of empic^jyees andtiieir response to customers."" l^otii iinpiy tiiat effec-tiveness comes from ieveraging inteiiect and knowi-edge rather than from economies of scale in opera-tions or physical sources of acivantages.

44 This vector complements the logic of virtual organiz-ing in the previous two vectors. Here we focus ontiie possii^iiilies and meciianisms fbr ieveragingexpertise at many levels. Senior managers face thesequestions: How do we recognize anci ieverageknowiedge as a corporate a.s.set? How siiould wemanage knowledge workers wiien iuiman resourcepoiicies are geared toward prociuction anci adminis-trative workers? How do we design processes forieveraging knowledge when most proce.sses areciesigned fc r cosi optimization and efficiency? Whatmechanisms shouici we use for ieveraging lacitknowledge, since we have focused previously onexplicit (codified) knowledge? What incentives ancicompensation practices fiike stock options) wiliattract and keep knowiedge workers? To addressthese and related questions, we delineate three stagesof knowledge leverage: iiarnessing work-unit exper-tise, recognizing knowledge as a corporate asset, andgaining access to broad professional communityexpertise.

Work-Unit ExpertiseRecently, the redefinition of tasks has been accompa-nied by more work being distributed across time anddistance. More tasks can be decomposed so they canbe done at different lcjcations and time periods (forexample, customer service, order fulfillment, or newproduct development). However, their effectivene.ss isensured througii the depioyment of integrateci controisystems supported iiy groupware.

The expertise to carry out the tasks of a work unit, loachieve performance improvement as a leam, cannotbe achieved iiy individuals. American Airlinesdeployed an expert .system. Smarts, to complementits reservation system, Saiire. .so sales repre.sentativescouici develop target proniotionai programs toincrease its market share anci profitability.'- MerriiiLyncii's succe.ss is attriiiuted to its aiiiiity to codifyand distrii>ute higii-ievei anaiyticai skiiis to its differ-ent work units.''

Hewlett-Packard faceci the challenge of capturing theknowledge from tiie use anci support of its compiexgioiial products. Customers neecied support thaiinvolved constantly changing technical configurations.In 1995, HP created a case-based reasoning tool tocapture teciinicai support knowledge for possiiiie usei")y sen'ice and support personnel worlciwide. Thisinitiative iias made tiie distributed service work uniteffective: tiie average time for caiis has been reducedtwo-thirds, and tiie cost per cali has iieen lowered SOpercent.''

An organization s aiiiiity to make proce.s.ses effectiveis increasingiy supported by impro\'ements in ITfunctionality like groupware (Lotus Notes), \ideocon-ferencing, and intriinets tliat facilitate teani-le\el coor-dination and exciiange of information and knowi-edge. Teams de\'eiop efTecti\'e routines fbr siiaringknowlecige anci expertise. Consulting companies havecreated successful modeis of knowiedge siiaringw'itiiin teams tiiat are not in tiie same time zone.Pharmaceutical companies iia\e cieployed new prod-uct development teams that take advantage of thetwenty-foilr-iiour ciock by ciistriiiuting work to teamsin differenl time zones. Teams in financiai senicesfirms work around the ciock to create products andservice clients in the global financiai marketpiace.

Case-iiaseci reasoning tools (like tiie HP case),expert systems, neurai nets, and the Weii aiiowfirms lo capture anci ieverage knowledge to theseciisiributed processes on a giobai basis. The realchallenge in maximizing work-unit expertise liesnot in ciesigning the technological platform to sup-port group work but in designing the organizationstructure and processes. What is the best way tobring different perspectives into a task team? Howdo we balance tlie need for colocation w itii therec]uirement lo get the iiesl possiiiie expert? Howdo we design tiie performance assessment systemfor tiie work unit so that it encourages teamworkratlier than individual performance? Many compa-nies iike Honcia. Unilever, Joiinson <!<: Johnson,Motorola. GH. Boeing. Kodak, Xerox, and othersare experimenting witii structures, processes, andtechnologies that maximize work-unit expertise asthey move away from functionaliy baseci organiza-tions to a process-driven approach.

Corporate AssetTiiis second stage focLises on harnessing the collec-tive expertise acro.ss work uniis. rather than within

\fenk3traman • Hendeison Sloan Management Review

units. The main focus is less on tangible and codifiedknowledge and more on tacit knowledge to collec-tively leverage. Both Xerox and IiP treat knowledgeas a corporate asset, one of the new drivers ot bot-tom-line profits and top-line growth.

• Xerox captures knowledge about new ways of ser-vicing its machines. Many different knowledge workers— customer service engineers, field .sendee engineers,and product .specialists — created the Eureka prcx'ess,which rests on a database called Tips. Key to thisprcK'ess is the emphasis on validation of expertise andknowledge. After a "tip" (an idea or suggestion to .solvea problem) is submitted, tip authors can monitor itsprogress through the validation proc-ess. and the origi-nator's contribution is recognized. They can obsen-e alldie comments and interact with \alidators. The tip isseen not as the asset of an isolated department or afunction but ofthe corporation.''

• Starting in 1995, BP has experimented with a vinu-al teamwork program. When ecjuipment fails in theNorth Sea, the drilling engineers haul the faulty hard-ware in front of a tiny video camera connected toBP's virtual teamwork .stations. Using a satellite link,they can call a drilling equipment expert in Aberdeenwho can visually inspect the part while talking to theshipboard engineers. Thus distributed expertise is vir-tually brought to bear on the problem tliat recjuirestime-sensitive response."' According to John Browne,group chief executive, British Petroleum: "Advancesin communications technology — particularly highbandwidth communication and information systems

— allow the people working on a field in the NorthSea to talk directly and to share experience with thepeople working offshore on a field in the Gulf ofMexico 5,000 miles away."''

Knowledge is a corporatewide asset that

should be systematically managed.

Consulting organizations like Arthur Andersen.McKinsey, KPMG, and others are also focusing onidentifying, capturing, and leveraging their knowl-edge assets. Arthur Andersen combined convergentand divergent systems; the former focuses on codi-fied information translated into knowledge and com-municated through standard channels at prespecifiedinten'als; the latter is a knowledge-creating system

based on information not codified but disseminatedin real time. Similarly, the World Bank is reposition-ing itself as a provider of knowledge-driven services(www.worldbank.org). According to James Wolfensohn.president of the World Bank: "We need to become, ineffect, the Knowledge Bauk.'""

Common to these examples is the notion that knowl-edge (or intellectual assets) is a corporatewide assetthat should be systematically managed. At the U.S.Army's Center for Army Lessons Learned (CALL) dur-ing the 1994 Haiti invasion, CALL experts inter\'iewedsoldiers about incidents with mobs and confrontationwith local authorities, obsen'ed after-action reviews(AARs). and read intelligence reports to compileles.sons. CALL developed twenty-six training scenariosfor replacement units getting ready for Haitian duty;in the following six months, the units encounteredtwenty-three of the twenty-six scenarios. Similarly,the CALL process helped the army in Bosnia withearly reports of incidents and the consequent distilla-tion of likely actions." Companies like Motorola. GE,Stc'clcase, BP," and GM'' are beginning to u.se theAARs developed by the army — each developingtheir own scenarios or lessons.

Professional Community ExpertiseIn the third stage, the focus is on the community ofprofessional expertise — well beyond the domain ofa focal organization. For instance, 1,000 staff peopleat HP collaborate with more than thirty of their part-ners and suppliers through a virtual team platform,desktop collaboration, information-sharing tools, andvideoconferencing. Through coaching, BP has beenable to transfer tacit knowledge acro.ss lioundaries.

Organizations are increasingly le\eraging the exper-tise in the extended network (suppliers, customers,partners, alliances, and so on) and the broader pro-fe.ssional community. For instance, .some firms retaina core of experts on their payroll while contractingfor other skills as needed. LInlike contract workerswho smooth out fluctuating demand, this expertise isfor specific tasks and is often connected electronical-ly. The knowledge of lawyers, medical practitioners,advertising executives, investment bankers, and tech-nology gurus is often leveraged within an extendedcommunity through electronic networks.

Recent advances in IT — especially the deploymentof a global, accessible, collaborative infrastaicture —•fundamentally enable this virtual leveraging of exper-

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Venkatraman • Hendeison

tise in the professional network. It is possihle to get asecond opinion on a medical procedure by allowingother experts to \'iew the complete medic'al liistor\-and associated images from remote locations. Multi-ple experts from different locations can simultaneous-ly interpret the meaning of an unforeseen ex'ent likea currency crisis in Mexico or lairope or realignmentin the e.xchange rate between the K.S. dollar and theJapane.se yen. As com|-)anies identify antl integrateexpertise from multiple sources, they face the clial-

46 Icnge of how best to compensate anci motivateemployees with expertise. The traditional employ-ment c-ontract might have to be replaced with a morespecific contract linked to the le\-erage of expertise.

Kmergent x'irtual ct)mmunities .sen'e as a primar>'mechanism for collecting and legitimizing know-ledgeand expertise. The Motley Fool (www.fool.com) isone example; more .sLicli communities will likelyemerge.

Amazon is strategically positioning itself in theknowledge network to indutle book reviewers andcritics, technology de\'elopers who constantly pLisliAmazon to the cutting edge of the Web platform,logistics experts who optimize the physical distribu-tion of books, and sociologists who stud\- the emerg-ing patterns of electronic communities. Amazonneeds a wide range of experti.se if it is to be at thetop of this new business model. The knowledge net-work from the community is more important as itexpands be\-ond books to incliEde movies. CDs, ancioiher products ibr the same customers. Its aiiility toIe\'erage the knowledge and expertise of its commu-nity might help Amazon maintain its leadership posi-tion.

Questions for Managers• Does your organization recognize the importanceof knowledge and intellectual assets in creating\-aiue? If .so. what are the mechanisms (formal andinformal) for implementing?• How well are your task units fteams and groups)le\-eraging their collecti\-e expertise? What characteris-tics of the IT platform support knowledge leveniging%\-ithin the unit?• Do you treat knowledge as a corporate asset? If .so.how is knowledge linked to organizational effectiveness?• Are you effecti\-e in positioning your prtjfessionalexpertise within a comnumity rele\'ant for your busi-ness? What is your position in the community, rela-ti\x' to your competitors?

• Wliat qualitative anci quantitative indicators are youadopting to better le\'erage knowledge in creatingvalue? What companies cio you Lise for benchmarking?

Nine Challenges for TransitionThe implications of making a transition to the newbusiness model are:

1. Shifting value drivers. i-A ei"j- corponition shoulddevelop a systematic approach to recognizing andresponding to shifts in what dri\'e.s value. Microsoft,Intel. Starbucks, Amazon.com, \'ah()o!. IW l-!xplora-tion, and others are focusing c n kntjwledge as dri-\ ers of their business capabilities. The stock marketvalues these firms for their intellectual assets morethan for their physical assets. Recognizing the shiftanci responding to it is key.

2. Designing the new business model. Tlie businessmodel is a coordinated plan to design strategy" alongall three vectors rather than leading in any one \'ec-tor. Strategies should ret-ognize the interdependenciesamong the three vectors.

3. Governing beyond outsourcing. Sourcing hasbecome a primaiy aspect of the strategic logic.Companie.s should cie\'elop a strategic approach tog{)\ernance that constandy shifts the management oftangible assets to the market \\'here the market is[iiLiture. At the same time, they sht)uld focus on thego\'ernance of \'alue-addeci intellectual assets inside.

4. Interacting with customers for knowledge lever-age. Distribution channels are a strategic link withc-ustomers for gaining ai-cess to critical knowledge.Customers increasingly participate in the product orsenice development proce.sses much earlier and pro-\'ide useful information for enhancing prodLict \'alue.More importantly, participating in the customer com-munities enables a company to be in the midst ofinformation flows about new product features.

5- Navigating across muitipie communities. Marketleaders are differentiated by their ability to positicjuthemsel\-es in a network of communities — cust<}mercommunities, resource coalitions, and professionalcommunities. Companies need to play \arious roles\\-itliin these communities — sometimes active, other-wise passive: setting rules sometimes while folto\\'ingrules at others; and competing and cooperating withthe same firm at different times or in different settings.

Venkatraman • Henderson Slaan Management HeviawFnll m^

6. Deploying an integrated IT platform. Market lead-ers sliould design ati integrated IT platform for thenew virtual busine.ss tnodel. They should experitnentwith various tec-hnological alternatives as they .stt-iveto align their business stt-ategy with the IT strategy.The Internet (iticluding inti-atiets and extninets)tnakes possible a common platform that allows forinter- and intraorganizational coorditiation oti a scalenot pre\iousiy possible. IT is both a cause (dist-uptionof tnat-ket equilibrium) and a solution (buildingblocks for the new organizational logic). The technol-ogy t-ec[uiretiients for [lie tht-ee \'ectors are converg-ing, thus com]iellitig managet-s to take a more centrallook at the IT platfortii. .Senior managers catinot .sim-ply delegate resjionsibility to opet-atitig managers toexecute ati informatioti strategy- that supports thebusiness strategy. The rec|uitetnetit of continuallyaligtiitig business atid IT stnitegies is now tnoreitnpoiiatit thati ever before.

7. Allocating resources under increased uncertain-ty. Leaders are difierentiated by how- they allocatecritical t-esources. llnder conditions of relative certain-ty, cotiipanies can adopt preciictable models ofresout-ce allocation (for example, the discounted cashtlow and traditional net presetit \'alue calculations).Howe\er. the future is expected tcj be Lincertain.Leaders should adopt the di,scipline ofthe realoptions Lipproach to Licti\'ely allocate resources.'- Thata|-)pt-oacli brings the disciplitie of financial markets tostrategic decisions and calls for setiior managers toactively manage iiuestments to respond to changes

in external atid internal conditiotis.

S. Designing an organization for knowledge lever-age, tiompanies are experimenting wiih matiy different

organizational forms that overcotne the limitations ofexi.sting .stnictures and processes. The underlying logicfor new fonns should be to leverage knowledge acro.ssmultiple le\'els — within and across boundaries. Thereare no .strict or rigid principles for designing organiza-tions that leverage knowledge, but cotnpanies will con-verge on sotiie principles as new entities design organi-zations without the constraints of the old principles.

9- Assessing performance along multiple dimensions.Managers should tnove away frotn static, tnyopic tnet-rics like market share, as they Ix'cotne tneaningless withchanges in tnarket definition. Sitnilarly, they should sup-pletnent accounting metrics like ROI, ROA, and ROEwith tnore contetnponiry metrics like EVA (econotiiic\'alue added), MVA (market value added), and metricsthat capture the share of new wealth creation. Clearly,Yahoo! and Atnazon.com are not succe.ssful if we lookat tlieir profitability nutnlx^rs but are successful frotn astcK'k market valuation viewpoint.

ConclusionWhile vittual organizing is a powerful concept, "\irtu-al organization" is an imfortunate term. It connotesimpo.ssibilities such as a "hollow corporation" or aliroker." Virtual organizing as a concept focuses onthe importLince of knowledge anci intellect in creating\'alue. Our approach recognizes three interdependent\ecEots — \irtual encounter, virtual sourcing, and vir-tual expertise — supported by a powerful, integratedIT platfortn. The strategic logic for the new businesstnodel is rooted in the interdependence atnong thethree vectors. It will be difficult — if not itnpossible— to craft an effective strategy and structure withoutharmony atnong the three vectors.

47

References

This paper is based on a research project with a grantfrom the Advanced Practices Council (APCI Df theSociety for Information Management (SIMI tilled."Avoiding the Hoiiow: The Bjilding Blocks of VirtualOrganizing." We thank Madeline Weiss, Bob Zmud, LeeSproull. and members of the SIM-APC and BostonUniversity Systems Research Center for sharpening theframework and developing the management implica-tions. This work was also supported by the NationalScience Foundation under Grant No SBFl 9422284IPrincipal Investigator. N. Venkatraman). Any opinions,findings, conclusions, or recommendations are theauthors' and dc not necessarily reflect the views of IheNational Science Foundation. We also thank LeeSproull for stimulating our thinking about knowledgene^vorl^s and the role of communities and PRBalasubramanlan for useful comments.

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Sloan Maoagemenl ReviewFall 1998

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